Monetary Policy According to HANK

We revisit the transmission mechanism for monetary policy on household consump-tion in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consumption because of two key features: multiple assets with different degrees of liq-uidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates that operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This nding is in stark contrast to Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. Moreover, the failure of Ricardian equivalence implies that the overall effect of monetary policy depends on the scal response that necessarily arises because monetary policy affects the government budget constraint. These ndings have important implications for the conduct of mon-etary policy, in particular for the efficacy of forward guidance